Tuesday, December 31, 2019

12:10 p.m. New York time

A busy morning in my stock portfolios, with six exits and three entries. To me it suggests that the markets are churning at a top, leading to a downward correction, big or small.

Today’s trades:

  • Exits
    • Value Portfolio: PWR for a $40.82 credit, up 45 cents per share from entry, showing a 1.1% return over 22 days for a +19% annual rate.
    • Growth Portfolio
      • DCO for a $50.25 credit, up $1.77, producing a 3.7% return over 39 days for a 34% annual rate
      • MOMO for a $33.84% credit, down 3.51 from entry, a 9.4% loss over 29 das for a -118% annual rate.
    • Momentum Portfolio: CROX for a $41.92 credit, up 69 cents, showing a 1.7% return over four days for a 154% annual rate
    • Genetics Portfolio:
      • INCY for a $35.05 credit, down $4.51, producing a 4.9% loss over 14 days for a -128% annual rate.
      • NTLA for a $14.65 credit, down 57 cents, resulting in a 3.8% loss over 12 days for a -114% annual rate.
  • Entries
    • Growth Portfolio: AOSL, a $13.59 debit.
    • Genetics Portfolio:
      • AAPL, a $291.90 debit.
      • EDIT, a $29.70 debit.

So three losses, three wins on the exits.

By Tim Bovee, Portland, Oregon, December 31, 2019

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Live: Monday, December 30, 2019

11:45 a.m. New York time

I’ve entered a position on IRWD in the Momentum Portfolio, for a $13.45 per share debit.

11:15 a.m. New York time

SSD dropped off of the Growth Portfolio screen, and I exited for an $80.30 credit, a loss of $3.10 per share. The position produced a 3.7% loss over 59 days, or a -23% annual rate. It peaked six days after entry and swung into a slow decline.

By Tim Bovee, Portland, Oregon, December 30, 2019

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Trading Rules revisions

With the New Year rapidly approaching, I’ve redone my Trading Rules linked to on the top menu bar so that they match the practices I’ve developed over the fall and the first week of winter. They seem to have stabilized at this point; I can’t see any changes that I want to make immediately, although that’s not a promise for the future. Here are the new rules: Options first, then stocks. Enjoy.


Levels of Risk

Risk is everywhere. There is, in reality, nowhere without risk. Every thought can trigger risk. Every act can be risky. Every result, happy or sad, is a balance between risk and reward.

Keeping risk in mind, I have divided my holdings into three levels: No risk, low risk, mid-risk, and high risk. See the About page for more.

For any trade, low risk to high risk, there are two rules that rule them all:

  1. Have a defined rule for entering a position.
  2. Have a defined rule for exiting a position.

I’ve traded outside of those universal rules on occasion, and have always regretted it.

Outside of the two universal rules, only the mid-risk and high-risk positions have formal rulesets, and those are what I shall discuss here:

  1. High Risk: Options Contracts
  2. Mid-Risk: Momentum Trades of Shares
  3. Mid-Risk: Managed Shares

 

High Risk: Options Contracts

My options trading rules are straight out of research conducted by Tom Sosnoff‘s Tastytrade financial network, with the exception of the exits rules, where I’ve expanded on his methods. The rules are intended for smaller accounts, and has the goal of many base hits rather than the occasional home run amid a lot of strikeouts.

Trading Rules

Positions: Short vertical or iron condor spread.

  • Set the short leg or legs someone from delta 16 to 30. The higher the delta, the greater the risk and the smaller the odds of success.
  • Select an underlying stock whose Implied Volatility Rank (IVR) is 25% or greater. The higher the IVR, the greater the potential return. (This is similar to the IV Percentile found on many trading platforms.)
  • Set the width of the wings so as to be as close as possible to a third of the credit received.

Entry timing: As close as possible to 45 days prior to expiration, giving preference to monthly options. Generally, I won’t enter after 43 days prior to expiration.

Due diligence before entry:

  • Avoid earnings announcements
  • Avoid ex-dividend days
  • Ensure that the potential loss is within the trader’s guidelines for managing trading funds.

Exit rules:

  • Up to 21 days prior to the options expiration
    • Profitable trades:
      • Exit at 50% of maximum potential profit, calculated as this way:
        • (credit_received – current_debit) / credit_received
        • where credit received is maximum potential profit and current debit is the cost of exiting the position. If it’s negative, the position is a losing one at present.
  • 21 days or fewer prior to the options’ expiration
      • Exit if the position is profitable, even if minimally so
      • Hold an unprofitable position until
        • It becomes profitable, even minimally so, or
        • It expires unprofitably.

 

Mid-Risk: Share Trades

This strategy relies on a rule-based evaluation for the selection of stocks and on a 20% trailing stop/loss for the exit signal.

I divide my holdings and trading decisions into portfolios, depending upon the method used to evaluate potential additions.

My portfolios are divided into two sorts.

Strategy portfolios use a search of a category of stocks for a symbol that meets certain criteria corresponding with a strategy. I have three strategies that I use:

  • Growth, which relies on ratings changes given my market analysts.
  • Momentum, which relies on the rate of change over several lengths of time.
  • Value, which relies on the financial performance of the company compared to the price of its stock.

A second sort of portfolio, a watchlist portfolio, takes a relatively small list of stocks and trades those that meet general criteria according to one system or another.

At present I have only one such portfolio: Genetics. It was constructed based on the ARKG exchange-traded funds holdings.

Depending upon the rules, all of this can be done by the trader without relying on the analysis of others. For convenience, I’ve chosen to rely on the analysis aggregator Zacks  to provide the ratings of stocks that I use in making decisions.

Zacks uses analyst ratings on their primary method, using earnings forecasts to select from their already screened pool. Their method boils everything down to a numerical rank: 1 for strong buy, 2 for buy, 3 for neutral, 4 for sell and 5 for strong sell. The rating is relative: The top 5% of their stock pool gets a 1 ranks, as does the bottom 5%. The 2 and 4 ranks each get 15% of the pool, and the 3 rank gets the remaining 60%. So the ranks aren’t objectively good or bad, but only in relation to the rest of the approximately 10,000 stocks the company tracks.

For my strategy portfolios, I require that stocks have a Zacks rank of 1 for entry, and I exit that day if it drops away from the strong buy level. For my watchlist portfolios, I’ll requires a Zacks 1 or 2 rank for entry, with exit rules if that changes to a neutral or sell rank.

Upon buying the stock, set a trailing stop/loss for 20% below the fill price as the condition for exit. 

The stop/loss rule was based on three research papers:

Han, Yufeng and Zhou, Guofu and Zhu, Yingzi, Taming Momentum Crashes: A Simple Stop-Loss Strategy (September 24, 2016). Available at SSRN: https://ssrn.com/abstract=2407199 or http://dx.doi.org/10.2139/ssrn.2407199

Yusupov, Garib and Shorrason, Bergsveinn, Performance of Stop-Loss Rules vs. Buy-and-Hold Strategy (2009). Available at Lund University: https://www.lunduniversity.lu.se/lup/publication/1474565

Kaminski, Kathryn and Lo, Andrew W., When Do Stop-Loss Rules Stop Losses? (January 3, 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=968338 or http://dx.doi.org/10.2139/ssrn.968338

The Zacks rank method presents trades almost every day, as stocks fail to qualify and new stocks qualify to take their place. A no-commission brokerage, which includes the pioneering Robinhood and the major brokerages such as E-Trade and TD Ameritrade that have followed in Robinhood’s footsteps, makes such rapid trading possible. A brokerage that charges commissions would require a different approach.

Zacks makes its ranks for individual stocks freely available, and that is sufficient for managing a small watchlist portfolio.

For example, in creating my Genetics Portfolio, I took the holdings of the ARKG exchange-traded fund — 37 stocks — and within Zacks created a portfolio containing those symbols. The portfolio includes up-to-date rankings for each symbol. Just by pulling up the portfolio and sorting on rank, I can instantly see what the tradable stocks are and compare it with what I already hold. At this writing I hold all nine qualifying stocks.

For my strategy portfolios, which scans the entirely of the massive Zacks stock pool, it’s necessary that I be able to run queries against their databased, and for that I need a premium account, costing an annual subscription of $249. Traders with small accounts will do better by using the watchlist method, thereby avoiding the overhead.

The subscription works out to $20.75 a month, and I’ve entered about 30 positions in the current month, so divide by 60 — once for entry and again for exit — and it works out to a 35 cent premium per trade. Not such a bad deal, considering that in the bad old days of last spring, the commissions would have been at least $13 total for each position.

By Tim Bovee, December 28, 2019, Portland, Oregon

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Live: Friday, December 27, 2019

3:05 p.m. New York time

A holdings inventory:

  • Options
    • Short iron condor XLY
  • Shares portfolios:
    • Strategy
      • Growth CRAI, DCO, HA, IBP, MOMO, NSIT, RH, SSD, TLYS
      • Momentum CROX, JNCE, OESX, PAAS
      • Value PWR
      • Income DX, HYG
    • Watchlist
      • Genetics AQB, BMY, CGEN, CLLS, CSTL, GH, INCY, NTLA, PSTI

2:50 p.m. New York time

I found some spare change that I used to add CROX to my Momentum Portfolio, for a $41.23 debit.

11:30 a.m. New York time

I’ve updated my TLT analysis with results.

11:10 a.m. New York time

No stock trades today.

10:50 a.m. New York time

Today is management day for the JAN monthlies, 21 days before the January 17 expiration.

I exited my short iron condor position on TLT at 50.7% of maximum potential profit, a bit more than my 50% target. My short iron condor position on XLY remains unprofitable, so I’ll continue to hold it, exiting at the first sign of profit, no matter how small.

I’ll post the TLT results in detail later this morning.

By Tim Bovee, Portland, Oregon, December 27, 2019

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Live: Thursday, December 26, 2019

10:15 a.m. New York time

And the trades are done:

  • Growth Portfolio
    • Exited
      • FCN for a $110.83 credit, up 91 cents, a 0.8% return over 29 days for a +10% annual rate.
      • WGO for a $52.67 credit, down 37 cents, a 0.7% loss over 36 days for a -7% annual rate.
  • Genetics Portfolio
    • Exited
      • EDIT for a $32.36 credit, down 5 cents, a 0.2% loss over two days for a -28% annual rate.
    • Entered
      • CLLS for an $18.39 per share debit.
      • PSTI for a $3.95 debit.
  • Momentum Portfolio
    • Entered
      • JNCE for a $9.55 debit
      • OESX for a $3.25 debit
      • PAAS for a $3.95 debit

So, total score, 3 out, 5 in for a total of 8 trades in 45 minutes. Not that anyone’s counting.

9:25 a.m. New York time

In stocks, Zacks’ algorithm dropped FCN in the Growth Portfolio to hold (rank 3), WGO also was removed from the screen, and I shall exit both. In the Genetics Portfolio, EDIT also dropped. Neither shows in the secondary portfolios (Momentum and Value), so away they go.

I shall enter two positions in the Genetics Portfolio, CLLS and PSTI, completing the build out. Also, with the Growth Portfolio build out complete, I’m starting fill the Momentum Portfolio, beginning with NCE, OESX and PAAS.

I’ve posted some thoughts on portfolio-building in the new era of no commissions: DIY ETF.

By Tim Bovee, Portland, Oregon, December 26, 2019

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DIY ETF

As we move forward to the New Year, I can’t shake the feeling that for private traders, like us, 2019 has proven to be a magical year, a year that finally, throughout the brokerage industry, has removed from us the shackles of commissions from our trading. Many of the new things I’ve attempted in the past months has been help me understand the opportunities opened up by a commission-free world.

One thing it means is that I can build my own equivalent of an exchange-traded fund, free of the expense ratio built to the price. Sure, it’s generally quite small — 0.09% in the case of SPY, for example. But it adds up, and as a trader, I’m reluctant to give up even a penny of potential profit.

That small expense payment compensates the fund for the cost of its management — buying and selling shares to maintain various balances. But I know how to trade. And I live in Portland, Oregon, where do-it-yourself is strongly held ideal. I don’t need to pay someone to trade for me when I can easily build my own DIY ETF.

When I hear people singing the praises of index funds, I can’t help think that they’ve forgotten what a fund is. It’s stocks, bundled together, but still separate, with separate earnings and market risks and dividends and management smarts. A third advantage of having no commissions to pay is that I can pick and choose from among a fund’s holdings and buy only the best, using whatever rating system I prefer. (I use Zacks premium, paying for it with the money saved with commissions.)

When I first set up the Genetics Portfolio a short while back, I was testing the idea that I could show good returns if I were to pick only the stocks ranked “buy” by Zacks from the entirety of an exchange-traded funds holdings. By being selective, I should be able to improve on the fund’s performance.

So how good are the stocks that funds hold? Are the managers carefully picking the best of the best?

There were, I found, surprisingly few stocks with “buy” rankings (ranks 1 or 2). In the 37 ARKG holdings, only one symbol is ranked 1, and eight ranked 2. That means 74% of the fund’s stocks have a Zacks rank of hold or sell or, as is the case with three symbols, have no analyst following and so no Zacks rank.

Intrigued, I took a look at some other ETFs, to see how they stacked up. DJI, which tracks the Dow Jones Industrial Average, has 30 stocks, only seven of which are ranked “buy”.

I looked at several sector ETFs, the sort that do well in the late stage of the business cycle and continue to outperform during the recession. XLP, the consumer staples sector fund, has four stocks ranked “buy” out of a total of 33 in the fund’s holdings. XLV, the health care sector fund, has has 16 “buys” out of 61 holdings. XLU, the utilities sector fund, has four ranked “buy” out of 28 holdings.

There’s a fourth advantage to building our own funds. The big ETFs own a lot of shares, and that means they aren’t very nimble, because it takes time to find buyers or sellers of such large lots. Private traders can get an instant fill. So rather than being forced by the logistics to hold on to underperforming symbols, we can trade in and out, commission-free, whenever we think it’s best for performance.

And indeed, we aren’t limited to subsets of the big funds. We can create our own, by whatever criteria we like. I’m partial to stock symbols that begin with “Z”, so my 10-symbol Zombie Portfolio can begin with ZEN, work trough ZUMZ and then reach completion with ZYNE.

An odd criterion? Yes. Worth experimenting with? It’s on my to-do list, perhaps as one of the wonders 2020 will bring.

By Tim Bovee, Portland, Oregon, December 26, 2019

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Live: Tuesday, December 24, 2019

11:30 a.m. New York time

Four symbols dropped off of the Growth Portfolio Screen, my primary, and the lone resident of the secondary Momentum Portfolio also dropped off. A new symbol appeared on the Growth screen, and I added a symbol to the Genetics Portfolio as I continue its roll-out.

So, in my shares positions, five exits, two entries.

  • Entries:
    • Growth Portfolio: HA for a $30.66 debit
    • Genetics Portfolio: EDIT for a $32.41 debit
  • Exits:
    • Growth Portfolio
      • CRCM for a $15.00 credit, a profit of $2.59, producing a 20.8% return over 15 days for a +506% annual rate.
      • EBMT for a $21.11 credit, a loss of $0.97. That’s a 4.4% loss over seen days for a -229% annual rate.
      • MHO for a $40.62 credit, a loss of $2.85, resulting in a 6.6% loss over 39 days for a -61% annual rate.
      • RS for a $120.96 credit, a profit of $1.07, or a 0.9% return over seven days for a +47% annual rate.
    • Momentum Portfolio
      • SEM for a $22.90 credit, a gain of $1.55, producing a +7.3% return over 39 days for a +68% annual rate.

That’s the lot. The Growth Portfolio is governed by changes in analyst opinion. So perhaps a wave of pre-holiday sadness has crept into Wall Street. SEM, in the Momentum Portfolio, began it’s life as a Growth play, and changed its coat to a Momentum play after dropping off of the Growth Portfolio.

A busy day with a shortened trading session. I’ll be back on Thursday, when the markets re-open.

By Tim Bovee, Portland, Oregon, December 24, 2019

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Live: Monday, December 23, 2019

2:35 p.m. New York time

Looking ahead.

Friday is management day for my two short iron condor positions based on options expiring next Friday, January 17. At present, TLT is at 34% of maximum potential profit, and XLY is in a loss status. So, if those numbers held, on Friday I’d exit TLT and hold XLY until it either showed a profit or was close to expiration.

On Friday, January 7, I enter positions based on options expiring February 20. It isn’t the best of environments for trading short iron condors, which require higher implied volatility. My rule is to trade them at a 25% Implied Volatility Rank. At present, only one (!) symbol qualifies for a short iron condor: TLT.

So what’s a neutral structure for trading low volatility symbols? For that, I’m trying something new: The calendar spread, which is a two-leg trade with strikes at the money. It can be built of calls if I’m expecting a drift upward in the price of the underlying, or puts if I’m expecting a lower tendency. Either will work if the symbol is stuck in neutral (best case).

One of the strikes is from the current cycle, expiring February 21 in this case, and is sold for credit. The other strike is from the next cycle, expiring May 15 (unless a new series is added), and his bought for a debit. The combined position is a net debit.

I’ll manage the calendar spreads at 25% of maximum potential profit, which is an estimate in the case of calendar spreads, and sell all profitable positions at 21 days prior to the short option’s expiration. Unprofitable positions will be held to expiration.

Symbols with an IVR of 15% or lower will qualify for a calendar spread. At this point that includes the metals (GDXJ at an IVR of 7%), energy (XLE at an IVR of 6%), and the blue chips (SPY at 4%).

Some resources from TastyTrade, my go-to place for understanding options trading:

Both are excellent.

1 p.m. New York time

Two symbols in my Growth Portfolio failed to qualify, and I have exited each for a profit:

  • AUY for a $3.56 credit, up 4 cents per share. The position produced a 1.1% return over 26 days, or a +16% annual rate.
  • CNXM for a $15.93 credit, up $1.44, a 9.9% return over 20 days for a +181% annual rate.

I continued my build-out of the Genetics Portfolio, adding CGEN for a $5.96 per share debit.

By Tim Bovee, Portland, Oregon, December 23, 2019

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Live: Friday, December 20, 2019

11:35 a.m. New York time

I’ve added GH to my Genetics Portfolio, for a debit of $82.71.

11:20 a.m. New York time

In my Growth Portfolio for stocks, the algorithm tossed up WGO as a new position, which I entered for a $53.04 debit.

PWR dropped off of the portfolio. However, it is also listed in one of my secondary strategy portfolios, Value, and so I’ll keep the position, which I entered on Dec. 9 for a $40.47 debit.

In my Genetics Portfolio, today brings the height of the ridiculous. Two positions that I entered yesterday, AQB and NTLA, and one that I entered the day before yesterday, CTSL, all lost their qualifying strategy scores, dropping from the portfolio list. All three continue to show a buy recommendation from Zacks, with a score of 2.

That’s more action in portfolio construction than I want. Only one of the three, NTLA, is showing a profit. And no wonder! Such rapid-fire changes get us into random walk territory rather than a trend.

So, I’m abandoning the letter grades assigned by Zacks to represent a position’s likely performance under a value, growth or momentum strategy. Instead, I’ll retain the three symbols, and going forward shall rely only a Zacks  score of 1 or 2 among the prospects as a qualification for entry. I shall use the strategy scores as guidance for which qualifying prospect I enter first.

Under the new rule, I retain AQB, BMY, CSTL, INCY and NTLA in the Genetics Portfolio. All have a score of 2. In addition, I can now add five more qualifying positions: GH with a score of 1, and CGEN, CLLS, ONVO and PSTI, all with scores of 2.

I’ll add the five in gradually as funds become available, giving priority to GH.

A good change, I think. After all, as a wise mentor once said to me about rules, Rules are for your benefit, not you for the rules. Flexibility is the soul of profit.

By Tim Bovee, Portland, Oregon, December 20, 2019

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Live: Thursday, December 19, 2019

2:15 p.m. New York time

I added two stock positions to my Genetics Portfolio: AQB for a $2.03 debit and NTLA for a $15.22 debit. That catches me up with all the stocks in my portfolio pool that match my criteria: A Zacks ranking of 1 or 2 and at least one of the Zacks strategy scores — Value, Growth, Momentum — at A or B. The pool size is 25 symbols, and there are only five symbols fully qualified at present.

The stock underlying my short iron condor options position on XLY goes ex-dividend on Friday. The options position is within the profit zone and is unlikely to be assigned, so I’ll stand pat.

By Tim Bovee, Portland, Oregon, December 19, 2019

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